Nats' plan to be rid of PFI

Discussion to end EDS contract began before Nats assured Parliament on progress. Tony Collins reports

Discussion to end EDS contract began before Nats assured Parliament on progress. Tony Collins reports

National Air Traffic Services (Nats) was secretly considering abandoning a £50m contract with supplier EDS when it told Parliament that the company had delivered a world-beating system.

Details of Nats' internal discussions on the state of a private finance initiative (PFI) contract for the new Oceanic air traffic system in Scotland were revealed in legal proceedings in advance of a High Court battle between Nats and EDS. The trial is due to start this week.

The battle comes after EDS sued Nats, claiming it had lost more than £40m as a result of the early termination of the Oceanic contract. It was due to run for 14 years until 2011. Nats terminated the contract in July 2000, claiming that EDS had failed to meet a vital deadline in May 2000, which EDS denies.

Now internal e-mails and other documents referred to in court papers show that Nats considered cancelling the contract months before the May 2000 deadline.

Between August 1999 and March 2000, Nats discussed the possibility of cancelling the PFI deal.

In the midst of these discussions, the then chief executive of Nats, Bill Semple, appeared before the House of Commons transport committee and praised EDS when he was asked by an MP to comment on the progress of the Oceanic contract.

Referring to EDS having built the first man-machine interface model for the new Oceanic system Semple said, "It looks a first-class world-beating system." He added that some Nats staff "have seen the system now and they all, universally, I believe, like the system".

But three weeks earlier, in November 1999, two senior executives at Nats, finance director Nigel Fotherby and programmes director Peter Finch, had exchanged e-mails concerning the "likely costs of renegotiating the [EDS] contract and of buying out or terminating it".

The question of termination was still under active review three months later. Following a Nats board meeting on 3 February 2000, Finch wrote a memo to Nats' chairman Roy McNulty, Semple and Fotherby. According to court papers it read, "After the spirited debate at the board meeting we were left in no doubt regarding the board's intentions. Nats wishes to be rid of both the PFI [contract] and EDS."

In public Nats and the Government have always claimed it was EDS' performance that led to the Oceanic contract being cancelled. But the Nats disclosures summarised in court documents suggest that Nats may have seen the Oceanic contract as an impediment to the forthcoming partial privatisation.

In an internal presentation on 5 March 2000, Brian Hayes, Nats' head of contracts and purchasing, said the existence of the PFI deal "represented a risk to the intended privatisation or part privatisation of the defendant [Nats]," court papers reveal. This is a reference to the sale of 46% of Nats last year to a group of airlines.

Nats has said publicly in the past that it was opposed to PFI contracts, partly because the return on investment accrues to the contractor, not Nats.

A further Nats memo dated 3 February 2000 referred to the need to exploit resolutely a "termination opportunity". At the February 2000 board meeting Finch is said to have given a presentation which requested support for terminating the agreement at the system's second critical design review in May 2000.

Last year, the Department of Transport denied in a statement to Parliament that the cancellation of the Oceanic deal had anything to do with the way it had been set up as a PFI contract. It said the termination was "simply the failure of the contractor to meet a major project milestone".

A Nats spokesman said, "All these issues will form the basis of the court case which we will defend vigorously. Our position on EDS and PFI is that we would have continued with the contract if EDS had performed."

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